The CRB (Commodity Research Bureau) index, a basket of 19 commodities which includes gold, silver, platinum, palladium, the industrial metals, the energy complex, and agricultural products, is our preferred measure to follow the entire commodity sector as an average. We reference the CRB’s performance for the reason that having the commodity complex moving higher will put the wind at our backs as precious metals investors. An important pattern is now nearing completion in the CRB which will impact not only the metals but diverse commodities over the years to come.
Note that the CRB is now making its 6th distinct attempt (red arrows) to overcome a clearly-defined resistance zone (black), which exists between 197 – 203 on the index, dating back to 2015:
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The above chart – in no uncertain terms – is a long-term bottom that is forming across the commodity complex. How do we know that this is a bottom and not a mid-cycle consolidation which could see commodities fall significantly further over the years ahead? We remind readers of the long-term view for the sector; the above chart fits snugly into the lower right-hand corner:
Commodities Multi-Decade View
A few points about investing in commodities:
- Commodities, unlike stocks, bonds, and currencies, cannot go to zero. As long as the world keeps spinning and humankind keeps breathing, we will need to discover and consume a diverse array of commodities to support our civilization.
- Thus, when commodities are priced at 40+ year lows and near a multi-decade support zone, this inherently represents a compelling value proposition.
- Now is presently the cheapest that commodities have ever been since the mid-1970’s, especially in real terms (adjusted for inflation).
- Although broad commodities do tend to move together in giant waves, something distinct is happening specifically to the precious metals over the past 15 years: note below the main chart, we show ratio comparisons of gold and silver, respectively, versus the rest of the CRB index. Since 2005 gold has outpaced the CRB by 575% while silver has outpaced the CRB by 325%. Something unique is unfolding amidst the historically-monetary metals around the world that is not happening to platinum, natural gas, or soybeans.
Commodities are Forming a Stage One Base
Refer once again to the 3-year view as shown in the first chart. The CRB is now making its 6th attempt to overcome its base 2015 – 2018 resistance zone. However, what do we mean by base resistance zone?
This is a term derived from stage analysis, first popularized by Stan Weinstein in his 1988 book Secrets for Profiting in Bull and Bear Markets. Stage analysis says that asset classes which cannot fall to zero go through four distinct phases in broad multi-year or multi-decade repeating cycles:
Stage 1 – A Bottoming / Basing pattern
Stage 2 – An Advance/Bull market
Stage 3 – A Distribution/Topping pattern
Stage 4 – A Decline/Bear market
Although the basic format of stage analysis may seem simple, it is actually extremely powerful when applied to long-term investment choices.
The essential takeaway is that if we only select assets which are in late-stage 1 bases or early-stage 2 advances when allocating long-term capital, we stand to significantly stack the odds in our favor.
Further, if we specifically avoid those classes which are already showing signs of late-stage 2 advances or stage 3 tops, we can eliminate a sizeable portion of the risk that comes from selecting investments.
It is incredible how many investors ignore this basic form of analysis and end up chasing investments higher after they have already experienced sizeable stage 2 advances. How many people were recently hurt by the crashes in the crypto-currencies or corrections in the stock market after they had already moved higher for many years? The ideal time to make a long-term investment is when an asset has been moving sideways for several years and begins to “round out” of its stage 1 base. The commodity complex fits this description precisely.
This is not to say that commodities cannot decline – they can. Stage 1 bases can feature a series of advances and declines which cause whipsaw amongst investors; that is, false-starts and sharp corrections that occur even as an asset remains in an overall bottoming process. Such surges and retracements are what make it difficult for early investors to hold on for the biggest gains. Still, on a Risk / Reward basis, stage 1 bases are the pattern that we always look for when selecting candidates for long-term holds. The CRB commodity complex is nearing the end of a multi-year stage 1 base at this time.
Summary of the Commodity Complex
This is an exciting time for precious metals investors as gold prepares to challenge its 2016 peak with the commodity sector providing a wind to its back. The entire commodity complex is bottoming in a 3-year stage 1 base at 40+ year valuation lows. For an asset class which cannot go to zero to be at its lowest real valuation in over a generation means that most of the risk has inherently been taken out.
Stage 1 bases can be complex affairs. They may last longer than many assume, as bases often represent a zone of sellers. Yet they are important bottoming patterns for future long-term advances no matter which final shape they take. Meanwhile, gold and silver have been outperforming broad commodities since 2005. This is not simply a commodity story – there is a premium that is being assigned to gold and silver by the sum of the participants in world markets. The reasons for these premiums could be due to worldwide monetary debasement, fear of war, or instability in world equity markets. We will know what these reasons are sometime in the future – for now, we are content to observe the outperformance on the charts.
Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency, where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is provided as a third party analysis and does not necessarily matches views of Bullion Exchanges and should not be considered as financial advice in any way.
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